Consolidation of physicians and other noninstitutional providers.

• Author: Siegel, Stephen H.
• Position: Florida

Once fragmented, the health care industry is consolidating with breathtaking speed. As a consequence of consolidation, health care providers such as hospitals, home health agencies, physicians, and medical equipment suppliers have undergone a fundamental change in the manner in which they conduct the business of delivering health care items and services.

This article examines the consolidation trend as it affects noninstitutional providers.[1] After reviewing some of the economic factors that are motivating noninstitutional providers to consolidate, the article will review some of the alternative structures that are being used for this purpose in Florida. The article discusses consolidation structures within the context of physicians.[2] However, the motivations and many of the alternatives are applicable to other categories of noninstitutional providers.

Economic Factors Favoring Consolidation

Some of the historical reasons for consolidation of "institutional" providers like hospitals and nursing facilities may seem obvious. Such facilities require significant capital in order to build and maintain their physical plants. Consolidation frequently provides opportunities to obtain needed capital, through either debt or equity financing, on terms more favorable than may be available to individual providers. Consolidation also offers opportunities to take advantage of economies of scale that otherwise unaffiliated individual providers may not be able to achieve. For example, group purchasing cooperatives historically have been one of the mechanisms used by institutional providers to take advantage of their collective purchasing power.

Physicians and other "noninstitutional" providers of health care items and services would appear to have some of the same motivations for consolidating. A number of factors including the relative ease of entry into these markets, generally lower capital requirements, and the historical tendency of this segment of the health care industry to be dominated by entrepreneurs and small business persons have worked to delay the consolidation of noninstitutional providers. The phenomenon of physicians and other noninstitutional providers looking to consolidate appears to result from two relatively recent factors (both of which noninstitutional providers have in common with institutional providers): the efforts to reduce the cost of health care items and services, and `providers' loss of control over their patient bases. The pace of consolidation among Florida physicians reflects the impact of these factors on their individual practices.

Cost Reduction Efforts

In 1983, the Medicare program implemented its prospective payment system for most inpatient hospital stays. Since then, the number of hospitals that have elected to merge or otherwise consolidate has increased dramatically. This, in part, is the result of reduced reimbursement levels. Hospitals are seeking ways to reduce operating costs through the economies of scale and other efficiencies larger organizations sometimes are able to achieve.[3] Inasmuch as other segments of the institutional provider industry, such as hospital-based nursing facilities and home health agencies, are tied to the success of their affiliated hospitals, these providers have been included in this consolidation wave. Freestanding institutional providers, who also are experiencing reimbursement reductions, also are consolidating in response.

Physicians and other noninstitutional providers similarly have been subject to reimbursement reductions by the Medicare program, Medicaid program, and various private third-party payors. For example, these payors have implemented fee schedules and tighter claims review mechanisms.[4] The reduction in physicians' reimbursements has pressured this group of providers to seek ways to achieve economies of scale and other operating efficiencies. Ironically, at the same time these so-called "cost containment" efforts are reducing the incomes of physicians and other noninstitutional providers, their operating costs are increasing as a result of more sophisticated and intensive medical services that are being provided on an outpatient basis.

A related cost control effort involves the emergence of the Florida and federal self-referral restrictions. These restrictions have the impact of limiting physicians' ability to supplement their incomes through investments in and affiliations with businesses that provide so-called "ancillary services."[5] For many physicians, the income derived from these ancillary services initially offset the impact of reduced reimbursement rates and constituted a significant portion of their incomes. The state and federal decisions to severely restrict this source of income has served to compound the problems physicians already had begun to experience as a result of declining reimbursement levels.

Loss of Control Over Patients

Probably a more significant motivation for noninstitutional providers' consolidation, particularly physicians, has been the growth of health maintenance organizations and other types of managed care organizations, such as preferred provider organizations and exclusive provider organizations (generically referred to as HMOs). One of the features that distinguishes HMOs from traditional indemnity insurance programs is the ability of an HMO to establish significant financial disincentives to enrollees to seek health care items and services from anyone who is not a "participating provider" of that HMO.[6] These disincentives range from having the enrollees responsible for making large deductible and coinsurance payments to "nonparticipating" providers, to refusing to make any payment for services rendered by these providers.[7]

Today, many physicians are finding a growing number of their established patients have become HMO enrollees. For a physician who refuses or is excluded[8] from participating in an HMO's network, the consequences to his or her medical practice can be significant. The physician suddenly may lose a large number of patients because they are members of that HMO and must see one of its participating providers. Even if a physician is a participating provider with a particular HMO, the outlook is not necessarily much more secure. Unless the parties agree otherwise, an HMO may terminate its contract with a participating provider, with or without cause, on 60 days' notice.[9] In short, the growth of HMO enrollment has lead to a situation in which many physicians are very concerned about the viability of their medical practices in the future. As the number of HMO enrollees continues to grow, very few physicians can afford to ignore these payers and have a realistic expectation of being able to develop and maintain their medical practices.

Physicians' Responses

For many physicians their primary objective has become to regain some control over their economic and professional future in a climate of reduced reimbursement rates, and the growth of HMO enrollments. The desire to reduce costs through the achievement of economies of scale has been a much less important objective of physicians who are seeking ways to respond to the changing economics of the health care industry. In order to achieve either objective, however, some form of consolidation appears to be necessary.

An individual physician is not likely to have a significant ability to negotiate with an HMO. A group of physicians may have improved bargaining "clout." This is particularly so when...